Company Stock in a 401k

Smart Money magazine has an article this month about employee investments in company stock within a 401k plan.

The article cites that although the numbers have improved, employees on average are still investing way too much in their own company's stock. Although no specific numbers on individual investment percentages were given, the article states that 10% of companies still match 401k contributions with their own stock.

With all the lessons in the past (think Enron, Worldcom, etc.) and some recent examples (Bear Sterns, Lehman) I am not sure why some employees continue to invest heavily in their own company stock. The article states that no more then 5% of the total balance should be invested in the companies stock. I agree with this number.

If you work at one of the 10% of companies who matches with company stock, my advice would be to sell the match as soon as possible and reinvest in a more diversified portfolio. Some plans may let you sell immediately while others may have time restrictions. If there are time restrictions, periodically remember to go into the account and sell the stock.

On a personal note, I currently have <1% class="blsp-spelling-error" id="SPELLING_ERROR_2">MMPF's accounts combined) in my companies stock. Although the Company is strong and continues to release solid numbers, I do not want a significant exposure of one stock in my retirement plans.

WisdomTree Currency ETFs

Another way to diversify your investment portfolio is through currencies other then the US dollar. These investments could help to offset some of the impact of the declining purchasing power of the dollar around the world.

Historically it has been difficult to invest directly in foreign currencies within a brokerage account. However recently, there has been numerous ETF offerings that now allow investors to purchase foreign currencies indirectly.

The WisdomTree line of currency ETFs not only offer exposure to foreign currencies, but also offer income generation through periodic dividends.

From WisdomTree's website -

The WisdomTree Dreyfus Currency Income Funds are exchange-traded funds (ETFs) that invest either in non-U.S. money market securities, or in a combination of U.S. money market instruments and instruments that are designed to provide
exposure to non-U.S. money market securities or rates. They seek to offer
investors current income reflective of foreign money market rates available to
U.S. investors, as well as exposure to changes in the value of a specified
currency relative to the U.S. dollar.

It is important to note that unlike traditional US money market funds that seek to maintain the $1 NAV, the WisdomTree ETFs NAV will fluctuate depending on a variety of factors.

WisdomTree currently offers the following 7 ETFs -

• WisdomTree Dreyfus Euro Fund (EU)
• WisdomTree Dreyfus Japanese Yen Fund (JYF)
• WisdomTree Dreyfus Brazilian Real Fund (BZF)
• WisdomTree Dreyfus Chinese Yuan Fund (CYB)
• WisdomTree Dreyfus Indian Rupee Fund (ICN)
• WisdomTree Dreyfus New Zealand Dollar Fund (BNZ)
• WisdomTree Dreyfus South African Rand Fund (SZR)

The Euro and Yen funds plan on paying dividends quarterly while the other funds plan on paying dividends annually.

Direxion Commodity Trends Strategy Fund (DXCTX)

As I have previously mentioned, I am always looking for ways to diversify my portfolio and hedge against downturns in the market. From time to time on this site, I will highlight some of the investment products I come across that may be used in your portfolio to help diversify.

In mid-June, Direxion launched a new fund called the "Direxion Commodity Trends Strategy Fund". The ticker is DXCTX. The fund invests in six commodity sectors including energy, industrial metals, precious metals, livestock, grains and softs.

From the Direxion website -

"The Commodity Trends Strategy Fund seeks daily investment results, before fees
and expenses, of the performance of the Standard and Poors Commodity Trends
Indicator"

"The Standard and Poors Commodity Trends Indicator is an investible long / short
strategy that offers exposure to 16 commodity markets (in six sectors) and will
hold them long or short, based on a seven month exponentially weighted moving
average. The long / short decision involves monitoring the price of the sectors
in relation to their respective seven month moving average price. The exception
to the model is the Energy sector which, due to geopolitical issues, economic
changes, and other factors uniquely related to the sector, is positioned either
long or neutral."

Energy and grains make up the largest component of the fund at 37% and 23%, respectively

The index has a 10 year average annual return of 12.3%.

The correlation of the fund versus the S&P 500 is -0.16 making it a great diversifying tool within a portfolio.

The fund can be purchased through Fidelity's network of no cost funds.

This post is not a recommendation one way or the other for the product, but is simply pointing out that it could be used as part of the commodities allocation within a portfolio for diversification.

Fidelity 130/30 Large Cap Fund (FOTTX)

I am a long term investor. I am not planning on using most of the money I have currently invested until at least 20 or 25 years. With that said, it is still difficult to watch your investments decrease by 20 or 30% during these normal bear markets. Although I am a long term investor, I am always looking for ways to hedge against some of the downturn.

Fidelity recently launched the Fidelity 130/30 Large Cap Fund. The ticker is FOTTX. For those who are not familiar with 130/30 funds, they are structured as follows. The fund shorts approximately 30% of the market. The fund uses the proceeds from the short positions to add positions on the long side, essentially taking the fund 130% long. Hence the 130/30.

These type of funds are supposed to protect your portfolio to some degree during a downturn since some of the positions are short. So let's see how FOTTX is doing versus the S&P 500 for the most recent bear market.

Overall I'd say not bad. As you can see, since the launch in April both funds have lost about 5%. The real story is related to the decrease to the lows in July. The S&P 500 was down as much as 12%, while FOTTX only lost around 6% at it's lows.

It's important to note that this is very short term performance. I'll post periodically about this fund versus the S&P 500.